Interesting Themes

By Peter Glynne-Percy

This week’s macro takes a tour around the world looking at some key macroeconomic stories.

Global growth is improving and broadening out. Developed market inflation is expected to accelerate in 2018 as output gaps close, creating a continued upward pressure on rates. However, global debt levels have risen since 2008, reaching 324% of GDP, and will act as a constraint on peak interest rates.

In the US, growth is on a solid footing, driven by consumer spending and business investment. Consequently the underemployment gap is closing, wages are slowly grinding higher and core inflation should climb towards 2%. There is an increasing probability the Fed will update their guidance and project 4 rate hikes during 2018.

European growth is firming and employment expectations are improving. There are still political risks which we must bear in mind, such as the Italian election outcome where the rise in populism has resulted in a North-South split and a hung parliament. In the UK, Brexit remains as uncertain as ever and continues to weigh on UK growth forecasts.

Recently, equities have experienced a healthy pullback ending the longest rally on record in US equities, without a drawdown of 3%. 3-5% pullbacks are not disruptive and typically occur every few months and give the market the opportunity to clear out stretched positions. Despite this, economic conditions are still generally supportive of equities.

As Quantitative Easing ends, financial market volatility is likely to increase and asset returns will come under pressure. From 2019, risks will increase further as Quantitative Tightening coincides with a large amount of corporate refinancing. Overall London & Capital retains a slightly defensive stance, a focus on bonds with less sensitivity to interest rates, non-cyclical-equities and uncorrelated alternative strategies.